The Words You Choose: Are Certain Expenses “Investments?”

Earlier today, Naked With Cash participant Anonymous S offered his latest financial update. He noted in June how after moving into a new apartment, he increased his credit card spending to pay for new household furnishings. He’s been calling this spending an “investment.” Our Certified Financial Planner, Roger Wohlner, offered the same feedback I would have given: calling expenditures “investments” can set a dangerous precedent and affects the way you view your finances.

The words you choose when describing yourself or your actions communicate how you think of yourself or your actions. For example, someone who refers to a problem as a habit rather than addiction when it is in fact an addition could be masking the severity of a problem.

There’s nothing wrong with what Anonymous S did last month. He spent more than he had on hand to furnish his apartment, accepting the cost of interest in return for furnishing the apartment immediately instead of waiting over the course of the next few months. Through his actions, he also indicated he was not willing to satisfy with inferior furnishings that he might have been able to find for less money.

As long as you weigh the consequences of using credit cards to supplement your income and using them isn’t part of an unhealthy pattern, I see little problem in taking advantage of the credit afforded to you. Others may see this differently, and might criticize the use of credit cards in any situation, or in any situation that doesn’t involve being able to pay off the balance in full each month. I’m more of a realist, and I can accept that although credit cards come with a cost, it’s a cost that can be avoided or taken into account. I can also accept that different households have different needs and priorities, and that households in healthy financial situations can handle the occasional interest charge if the trade-off is simplifying life for a short period of time.

It’s not the use of a credit card that worries me in this case, it’s the use of the word investment. Any particular word can have more than one meaning, and dictionaries don’t do a good job of describing the subtle differences between the inferences or senses of a word. To a financial planner, the word investment might have a specific meaning that is tied to a trade of money for some sort of asset that is expected to increase in value, with the idea that some day, that asset can be divested or liquidated, and the investor can walk away with more money than he or she started with. And the word investment might also imply there is some level of risk involved.

But when used by non-professionals, a broader definition might apply. An investment could be anything purchased of value or the process of purchasing anything of value. This is so broad that practically anything can be considered an investment. When I was working at a non-profit organization in my early twenties, I needed to earn extra money using whatever time I had left to myself after 80-hour weeks plus long commutes. I “invested” in a new computer to replace the one I had for nearly five years. In those intermediate five years, the World Wide Web had become mainstream and I needed a new machine to keep up with the latest technological needs for web development. I had no money, but I considered the new computer an investment in my future.

When it comes to building human capital, education is a large part of increasing the worth of your abilities, from specific job-related skills to cognitive flexibility, to yourself and to others. I consider the expense of a college degree as an investment because of the increase in lifetime earning potential that college graduates have over those without degrees. It’s an investment that’s expected to pay off in some form over the course of one’s life, even though recent economic troubles like unemployment make that difficult to see in immediate terms.

I can see how Anonymous S feels vindicated in calling household expenses investments. I know I’d probably be in a similar situation when I decide to buy a house. I wouldn’t want to leave the house empty for too long, and the furniture I could move from my apartment might do only a partial job in furnishing the house, and that’s even if I wanted to keep the same furnishings. With a new house, I’d want to quickly set my living space up to be exactly what I’ve pictured, and if I were unable to save up for the furniture in advance in addition to all the other expenses that come with purchasing a house, I would consider credit cards a valid option if I knew I’d be able to afford the expenses over a short period of time. I would only use credit cards if I didn’t think I wouldn’t be able to control my spending.

But I’d probably stop short of calling the purchases investments. I can see how spending $5,000 plus interest today might decrease my need to spend $5,000 in three months, but unless what I plan to buy is some sort of collectible item that has the possibility of increasing in value, it wouldn’t be an investment to me. And to call an expense an investment might do nothing more than to make me feel better about parting with the money. Personally, I have no need to fool myself into thinking something potentially harmful — spending more than I’ve saved — is potentially positive. For those that do try to present purchases to the world as investments might be setting themselves up for ignoring other negative aspects of their financial condition, and I believe that’s why Roger Wohlner, the CFP who comments each month on the financial progress of Naked With Cash participant Anonymous S, is not fond of the terminology choice.

You can use word choice to affect how you think about your situation. This can turn something that should be negative into a positive feeling or vice versa. Word choice can save you or it can prevent you from achieving your goals. In politics, this process is called “spin.” In marketing, the process is called “marketing.” In some cases, when word choice is used to intentionally deceive others, it’s called “lying.”

When you say that buying a new 72-inch television when your 42-inch will do and you don’t have the money is “investing in your happiness,” it’s just a way of hiding the fact you know it’s a bad financial decision.

Have you ever lied to yourself about the quality of your financial decisions by changing the words you use to describe that decision?

I hear people doing this all the time saying things like “I need to invest in a new pair of skis” or “I want to invest in some new furniture”… As you pointed out, most of this investment talk is just to make yourself feel better about spending money on more/different stuff. However, you COULD potentially be investing via spending on consumer products but only if you realistically calculate the ROI. For example, you MIGHT be investing when you upgrade your old appliances to a newer efficient model. Another example is getting a newer used car. I wrote a post which mentioned replacing my older BMW with 120K miles with a Mini Cooper with 20K miles at a cost of a couple of thousand after selling the bimmer. I had to sit down and justify this “investment” to myself with a spreadsheet showing the break even point and the point at which it would start paying dividends in gas, repair, maintenance and insurance savings. All of this after taking into account depreciation rates for both cars. Mini won and I got myself a new to me ride because it made sense from the ROI perspective!

One small fact: In the post, I mentioned that all credit card charges would be fully paid when the statement comes. If you look at the balance sheet, there is more than enough cash to pay off the card.

While a moving company may not be an “investment,” it is certainly a means to avoid later costs of purchasing furniture, especially if the furniture being moved has already been paid for. Costco purchases negate many smaller purchases later, at a cheaper price. I’m not going to get into discount rates and NPV, but buying a lot of food at Costco definitely saves money later.

This is so interesting. In his last post, Anonymous S points out that he did not carry a balance — he paid off that card in full as usual. That’s a big deal.

I have a hard time calling household goods and furniture an investment, since if he needed to turn around and sell it, he’d only get a fraction of what he paid. And that’s considering the items are still brand-new. Calling it a sunk-cost? Ok.

And a gift to a girlfriend could be an investment in the relationship I guess. I don’t think it’s quite the right word there, either.

Either way, he’s doing great and it sounds like the move was well worth it. June was a down month for me too, but these blips are all part of life.

I honestly don’t think people think furniture is an investment, but so many people abuse the word these days that it is common place and has almost sprouted a new definition. I’ve heard our family tell us to invest in a new pair of shoes because our old ones had a hole in them. I know they don’t think shoes are going to increase in value, at least I hope they know better than that!

It does bother me though, because of my college degree in business I’ve always thought of investments in the financial sense and I can’t get over people “investing” when they’re really just buying something.

A case can be made for calling high-quality furniture that you know will last for decades and “investment,” in terms that by spending more now, you will reduce your future costs. This is as opposed to buying cheap furniture that you will need to replace 4-5 times over the next 40 years, and eventually you will be paying as much for cheap, junky furniture as you paid now for the good stuff.

Similarly, “investing” in a new pair of shoes is an investment in yourself. If you look sharp, more opportunities will come your way than if you look shabby and run-down.

I think at some point marketers caught onto the word “investment” and started using it to sell stuff. It’s a far more sexy word than “expenditure”–it makes people believe they are saving when they are actually spending.
If you take many peoples’ definition of the word “investment” to its logical conclusion, *every* single expenditure is an investment. “I have to buy this for my girlfriend because it’s an investment in my relationship.” “I have to buy this lunch at this expensive restaurant because it is an investment in my body’s need for quality, organic fuel.” “I need to have lunch at this fast food restaurant because it takes too long to prepare my own meals in advance and this is an investment in time saving.” “I have to buy this insanely expensive SUV because it’s an investment in transportation because I need to get to work every day and transport the kids, so I’ll use it for years.” “I need a new $850 iPhone instead of a $100 Android because I’ll use it every day for years, and years, and years, and years, and it will never break and I will never ever want a newer model…”
BAH, I say! Your brain is bad–go fix it!

I find words are very important. They have a profound influence over not just how you see yourself but how others see you. Calling something an investment may do more than just making youself feel better about bad spending. It might help someone that does not have the best view of themself begin to see themselves better. I don’t think that is the case with Anon S. I expect it is more he has been conditioned by marketing enough that it was more slip of the tounge than anything else.

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